The problem with FCA's new mortgage test

http://www.theguardian.com/money/blog/2014/apr/12/fca-mortgage-test-problem

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It is to the colossal shame and embarrassment of every bank, building society and mortgage adviser – and the now-defunct Financial Services Authority – that, at the height of the lending boom in 2006-07, fully 45% of all loans issued to borrowers were on a "no income verified" basis. It was financial irresponsibility on a hitherto unknown scale (for which, of course, no one takes responsibility).

The new affordability tests will at least force lenders to carry out checks on income and spending.

But when the "clampdown" means that someone on £100,000 a year can take out a £700,000 mortgage and still meet what are supposed to be tough new affordability checks, then it's clear that brokers will be able to game the system.

Already the word is going out that borrowers must live like a monk for a few months before approaching a bank or building society for a mortgage, so they can safely clear the box-ticking exercise where spending is analysed.

Couples will be able to obtain a mortgage of five times their joint income, and still meet regulatory approval. Ultra-low interest rates mean the figures can add up: two people, both earning £35,000, have a joint take-home pay of around £4,400 (assuming no student loan repayments or pension contributions). A £350,000 mortgage will set them back just over £1,900 a month, assuming they have a 10% deposit and obtain the best five-year fix on the market at the moment (4.29% from Clydesdale Bank). Two careful spenders should be able to survive comfortably on the remaining £2,500.

But life is rather more chaotic than mortgage checking systems. People lose jobs, get pregnant, have accidents and fall ill. Taking out a mortgage of five times joint income is playing a game of Jenga – remove just one brick and the whole lot can come tumbling down.

The Financial Conduct Authority thinks caps on income multiples are a blunt instrument to control lending. But for "bluntness" read "simplicity" – they are an unambiguous yardstick and easily supervised, rather than the affordability tests that evidently can be manipulated.

House prices are a function of the amount that lenders are willing to advance; a blunt cap on multiples might be painful for some borrowers stretching themselves to buy an over-priced asset, but they would help everyone by deflating house prices. Similarly, regulators need to halt the drift in repayment terms from 25 to 30 years, which is a clear indicator of borrowers under stress.

Cooling our super-heated property market through stricter lending tests will, though, be pointless unless the FCA applies equivalent controls on buy-to-let lending. First-time buyers may well feel clobbered by regulation, yet landlords will be free to access loans on an interest-only basis and with tax advantages thrown in, almost entirely outside the new regime.

The FCA rules may tip lenders into preferring loans to investors and, while buy-to-let did not explode in the financial crisis, it did in Ireland and is storing up both social and financial problems in Britain.